Quest Diagnostics Incorporated , the nation's leading provider of diagnostic testing, information and services, announced that for the second quarter ended June 30, 2004, net income increased to $135 million, or $1.28 per diluted share, before $13.2 million in special, pre-tax charges, or $0.08 per share, related to the recently completed CEO succession process and the company's debt refinancing, both of which had been previously announced. Including these charges, net income was $127 million, and earnings per diluted share were $1.20. For the second quarter of 2003, net income was $120 million and earnings per diluted share were $1.12.
Second quarter revenues grew 6.4% over the prior-year level to $1.3 billion. Clinical testing volume, measured by the number of requisitions, increased 2.1%, and revenue per requisition increased 3.7%. The remainder of the revenue growth was contributed by the company's non-clinical testing businesses.
For the second quarter, operating income, excluding the charge for the CEO succession process, was $240 million, or 18.5% of revenues, compared to $219 million, or 17.9% of revenues, in 2003. Including the charge, operating income was $230 million, or 17.7% of revenues. Bad debt expense improved to 4.3% of revenues, compared to 4.8% a year ago. Days sales outstanding were 47 days, unchanged from a year ago. Cash from operations increased to $207 million from $169 million in 2003. During the quarter the company repurchased $226 million of its common stock and made capital expenditures of $46 million.
"We continued to improve organic revenue growth and expand our operating margin during the quarter," said Surya N. Mohapatra, Ph.D., President and Chief Executive Officer. "Our ability to generate strong cash flow enabled us to repurchase shares and continue investing to differentiate Quest Diagnostics in the marketplace. These investments have been focused on further improving our customer service, training our sales force to better communicate the medical value of new tests and technologies, and expanding the capabilities of our information technology products. Customers recognize the value of these investments when they select Quest Diagnostics as their laboratory provider."
For the first half of 2004, excluding the second quarter special charges, net income increased to $251 million, and earnings per diluted share increased 20% to $2.38 from $1.98 in 2003. Including the second quarter charges, net income was $243 million and earnings per diluted share were $2.30. Revenues increased 10.4% to $2.6 billion. Operating income, excluding the charge for the CEO succession process, was $449 million, or 17.6% of revenues, compared to $382 million, or 16.5% of revenues in 2003. Including the charge, operating income was $439 million, or 17.2% of revenues. During the first half of 2004, the company repurchased $271 million in common stock and made capital expenditures of $91 million.
Outlook for Third Quarter and Full-Year 2004
For the full year 2004, revenues are expected to grow in excess of 7%, with growth of about 1.5% contributed by Unilab, acquired February 28, 2003. Operating income is expected to approximate 18% of revenues, cash from operations is expected to approximate $700 million, and capital expenditures are expected to be between $180 million and $190 million.
The company continues to expect full year earnings per diluted share of between $4.80 and $4.90, before the second quarter special charges. Including these charges, earnings per diluted share are expected to be between $4.72 and $4.82.
For the third quarter, revenues are expected to grow approximately 6%, operating income is expected to exceed 18% of revenues, and earnings per diluted share are expected to be between $1.25 and $1.30. Quest Diagnostics will hold its second quarter conference call on July 22 at 8:30 A.M. Eastern Time. To hear a simulcast of the call over the Internet or a replay, registered analysts may access StreetEvents at: http://www.streetevents.com/, and all others may access the Quest Diagnostics website at: http://www.questdiagnostics.com/. In addition, a replay of the call will be available from 10:30 A.M. on July 22 through 11 P.M. on August 20 to investors in the U.S. by dialing 800-294-0997. Investors outside the U.S. may dial 402- 220-9755. No password is required for either number.
Quest Diagnostics Incorporated is the nation's leading provider of diagnostic testing, information and services, providing insights that enable healthcare professionals to make decisions that improve health. The company offers the broadest access to diagnostic testing services through its national network of laboratories and patient service centers, and provides interpretive consultation through its extensive medical and scientific staff. Quest Diagnostics is the leading provider of esoteric testing, including gene-based medical testing, and provides advanced information technology solutions to improve patient care. Additional company information is available at: http://www.questdiagnostics.com/.
The statements in this press release which are not historical facts or information may be forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results and outcomes to be materially different. Certain of these risks and uncertainties may include, but are not limited to, competitive environment, changes in government regulations, changing relationships with customers, payers, suppliers and strategic partners and other factors described in the Quest Diagnostics Incorporated 2003 Form 10-K and subsequent filings.
Quest Diagnostics Incorporated and Subsidiaries
Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 2004 and 2003
(in millions, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
Net revenues $1,297.7 $1,219.9 $2,553.4 $2,312.7
Operating costs and expenses:
Cost of services 747.6 703.1 1,484.9 1,351.2
Selling, general and
administrative 307.4 296.1 614.9 575.3
Amortization of intangible
assets 2.0 2.1 4.1 4.1
Other operating expense, net 10.6 -- 10.6 0.2
Total operating costs and
expenses 1,067.6 1,001.3 2,114.5 1,930.8
Operating income 230.1 218.6 438.9 381.9
Other income (expense):
Interest expense, net (16.4) (16.8) (31.0) (30.7)
Minority share of income (5.0) (4.4) (9.5) (8.2)
Equity earnings in
unconsolidated joint ventures 5.4 4.6 10.0 8.6
Other income (expense), net (1.2) 1.4 -- 0.6
Total non-operating expenses,
net (17.2) (15.2) (30.5) (29.7)
Income before taxes 212.9 203.4 408.4 352.2
Income tax expense 86.0 83.0 165.4 143.8
Net income $126.9 $120.4 $243.0 $208.4
Net income before
special charges $134.8 $120.4 $250.9 $208.4
Basic earnings per common share:
Net income $1.23 $1.15 $2.36 $2.03
Net income before special charges $1.31 $1.15 $2.43 $2.03
Weighted average common shares
outstanding - basic 103.0 105.0 103.1 102.5
Diluted earnings per common
share:
Net income $1.20 $1.12 $2.30 $1.98
Net income before special charges $1.28 $1.12 $2.38 $1.98
Weighted average common shares
outstanding - diluted 105.4 107.7 105.6 105.1
Operating income before special
charge as a percentage of
net revenues 18.5 % 17.9 % 17.6 % 16.5 %
Quest Diagnostics Incorporated and Subsidiaries
Consolidated Balance Sheets
June 30, 2004 and December 31, 2003
(in millions, except per share data)
June 30, December 31,
2004 2003
Assets
Current assets:
Cash and cash equivalents $137.8 $155.0
Accounts receivable, net 677.7 609.2
Inventories 72.8 72.5
Deferred income taxes 97.8 109.0
Prepaid expenses and other current assets 58.0 50.1
Total current assets 1,044.1 995.8
Property, plant and equipment, net 615.3 607.3
Goodwill, net 2,517.3 2,518.9
Intangible assets, net 12.8 17.0
Deferred income taxes 54.7 49.6
Other assets 102.7 112.8
Total assets $4,346.9 $4,301.4
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $639.7 $649.9
Short-term borrowings and current
portion of long-term debt 130.4 73.9
Total current liabilities 770.1 723.8
Long-term debt 971.7 1,028.7
Other liabilities 165.7 154.2
Common stockholders' equity:
Common stock, par value $0.01 per
share; 300 shares authorized;
106.8 shares issued at both
June 30, 2004 and December 31, 2003 1.1 1.1
Additional paid-in capital 2,231.7 2,267.0
Retained earnings 592.7 380.5
Unearned compensation (0.4) (2.3)
Accumulated other comprehensive income 1.0 5.9
Treasury stock, at cost; 5.1 and 4.0
shares at June 30, 2004 and
December 31, 2003, respectively (386.7) (257.5)
Total common stockholders' equity 2,439.4 2,394.7
Total liabilities and stockholders'
equity $4,346.9 $4,301.4
Quest Diagnostics Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2004 and 2003
(in millions)
Six Months Ended
June 30,
2004 2003
Cash flows from operating activities:
Net income $243.0 $208.4
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 83.9 75.0
Provision for doubtful accounts 112.3 113.5
Deferred income tax provision 9.7 5.9
Minority share of income 9.5 8.2
Stock compensation expense 1.0 2.9
Tax benefits associated with stock-based
compensation plans 40.0 9.5
Other, net 2.6 1.5
Changes in operating assets and
liabilities:
Accounts receivable (180.9) (158.0)
Accounts payable and accrued expenses (0.5) (63.8)
Integration, settlement and other
special charges (16.3) (9.3)
Income taxes payable 4.9 29.8
Other assets and liabilities, net 8.9 4.1
Net cash provided by operating activities 318.1 227.7
Cash flows from investing activities:
Business acquisitions, net of cash acquired -- (237.4)
Capital expenditures (90.8) (75.8)
Proceeds from disposition of assets 4.7 3.4
Increase in investments and other assets (2.9) (11.1)
Net cash used in investing activities (89.0) (320.9)
Cash flows from financing activities:
Proceeds from borrowings 304.9 450.0
Repayments of debt (305.6) (354.5)
Purchases of treasury stock (271.1) (10.1)
Exercise of stock options 66.8 9.2
Dividends paid (30.9) --
Distributions to minority partners (8.3) (6.3)
Financing costs paid (2.1) (4.2)
Other -- 0.4
Net cash (used in) provided by
financing activities (246.3) 84.5
Net change in cash and cash equivalents (17.2) (8.7)
Cash and cash equivalents,
beginning of period 155.0 96.8
Cash and cash equivalents, end of period $137.8 $88.1
Cash paid during the period for:
Interest $25.9 $32.5
Income taxes $112.4 $100.6
Notes to Financial Tables
1) Net income per common share is computed by dividing net income
by the weighted average number of common shares outstanding.
Potentially dilutive common shares primarily represent stock
options.
The following table presents net income and basic and
diluted earnings per common share, had the Company elected to
recognize compensation cost based on the fair value at the grant
dates for stock option awards and discounts granted for stock
purchases under the Company's Employee Stock Purchase Plan, consistent
with the method prescribed by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," as
amended by Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation -- Transition and Disclosure
-- an amendment of FASB Statement No. 123":
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
(in millions, except per share data)
Net income
Net income, as reported $126.9 $120.4 $243.0 $208.4
Add: Stock-based compensation
under APB 25 0.5 1.4 1.0 2.9
Deduct: Total stock-based
compensation expense determined
under fair value method for all
awards, net of related tax
effects (11.0) (13.2) (21.8) (27.9)
Pro forma net income $116.4 $108.6 $222.2 $183.4
Earnings per common share
Basic - as reported $1.23 $1.15 $2.36 $2.03
Basic - pro forma $1.13 $1.03 $2.16 $1.79
Diluted - as reported $1.20 $1.12 $2.30 $1.98
Diluted - pro forma $1.11 $1.02 $2.12 $1.77
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
Dividend yield 0.7 % 0.0 % 0.7 % 0.0 %
Risk-free interest rate 3.7 % 2.6 % 3.1 % 2.8 %
Expected volatility 47.1 % 48.5 % 47.2 % 48.1 %
Expected holding period,
in years 5 5 5 5
2) Other operating expense, net represents miscellaneous income and
expense items related to operating activities including gains and
losses associated with the disposal of operating assets. For the
three and six months ended June 30, 2004, other operating expense, net
includes a $10.3 million charge associated with the acceleration of
certain pension obligations in connection with the recently completed
CEO succession process.
3) Interest expense, net for both the three and six months ended June
30, 2004, includes a $2.9 million charge representing the write-off of
deferred financing costs associated with the second quarter 2004
refinancing of the Company's bank debt and credit facility.
4) In 2003, the Board of Directors authorized a share repurchase
program, which permits the Company to purchase up to $600 million of
its common stock. For the three months ended June 30, 2004, the
Company repurchased approximately 2.7 million shares of its common
stock at an average price of $85.34 per share for a total of $226
million. For the six months ended June 30, 2004, the Company
repurchased approximately 3.2 million shares of its common stock at an
average price of $84.76 per share for a total of $271 million.
Since the inception of the share repurchase program, the Company has
repurchased approximately 7.2 million shares of its common stock at an
average price of $73.54 for a total of $529 million. For the six
months ended June 30, 2004, the Company has reissued approximately 2.1
million of these shares in connection with employee benefit plans. At
June 30, 2004, $71 million of the share repurchase authorization
remained available. In July 2004, the Board of Directors authorized
the Company to purchase up to an additional $300 million of its common
stock, bringing the total available under the combined authorizations
to $371 million.
5) Free cash flow represents net cash provided by operating activities
less capital expenditures. Free cash flow is presented because
management believes it is a useful adjunct to cash flow from operating
activities and other measurements under accounting principles
generally accepted in the United States since it is a meaningful
measure of a company's ability to fund investing activities and meet
its future debt service requirements. Free cash flow is not a measure
of financial performance under accounting principles generally
accepted in the United States and should not be considered as an
alternative to cash flows from operating, investing or financing
activities as an indicator of cash flows or as a measure of liquidity.
The following table reconciles net cash provided by operating
activities to free cash flow:
Six Months Ended
June 30,
2004 2003
(in millions)
Net cash provided by operating activities $318.1 $227.7
Less: Capital expenditures 90.8 75.8
Free cash flow $227.3 $151.9
6) Net income before special charges excludes the charges associated with
the acceleration of certain pension obligations in connection with the
recently completed CEO succession process and the second quarter 2004
refinancing of the Company's bank debt and credit facility. Operating
income before special charge excludes the charge associated with the
CEO succession process. Both operating income and net income before
special charges, including per common share amounts, are presented
because management believes that it is a useful adjunct to other
measurements under accounting principles generally accepted in the
United States, including reported operating income and net income
since it is a meaningful measure of the Company's on-going operating
performance and is on a basis consistent with prior reported results.
Operating income before special charge and net income before special
charges, including per common share amounts, are not measures of
financial performance under accounting principles generally accepted
in the United States and should not be considered as an alternative to
reported operating income and net income as an indicator of
performance. The following table reconciles operating income and net
income before special charges to reported results:
For the Three Months Ended June 30, 2004
(in millions, except per share amounts)
Special Charges Related to:
Acceleration
of Certain
Before Special Pension Debt
Charges Obligations Refinancing As Reported
Net revenues $ 1,297.7 $ -- $ -- $ 1,297.7
Operating income $ 240.4 $ (10.3) $ -- $ 230.1
Interest expense, net (13.5) -- (2.9) (16.4)
Income before taxes $ 226.1 $ (10.3) $ (2.9) $ 212.9
Income tax expense
(benefit) 91.3 (4.1) (1.2) 86.0
Net income $ 134.8 $ (6.2) $ (1.7) $ 126.9
Basic earnings per
common share:
Net income $ 1.31 $ (0.06) $(0.02) $ 1.23
Diluted earnings
per common share:
Net income $ 1.28 $ (0.06) $(0.02) $ 1.20
Operating income as
a percentage of
net revenues A 18.5 % 17.7 %
A Calculated by dividing
operating income by net
revenues
For the Six Months Ended June 30, 2004
(in millions, except per share amounts)
Special Charges Related to:
Acceleration
of Certain
Before Special Pension Debt
Charges Obligations Refinancing As Reported
Net revenues $ 2,553.4 $ -- $ -- $ 2,553.4
Operating income $ 449.2 $ (10.3) $ -- $ 438.9
Interest expense, net (28.1) -- (2.9) (31.0)
Income before taxes $ 421.6 $ (10.3) $ (2.9) $ 408.4
Income tax expense
(benefit) 170.7 (4.1) (1.2) 165.4
Net income $ 250.9 $ (6.2) $ (1.7) $ 243.0
Basic earnings per
common share:
Net income $ 2.43 $ (0.06) $(0.02) $ 2.36
Diluted earnings
per common share:
Net income $ 2.38 $ (0.06) $(0.02) $ 2.30
Operating income as
a percentage of
net revenues A 17.6 % 17.2 %
A Calculated by dividing
operating income by net
revenues
7) Estimated comparable diluted earnings per common share represents
management's estimate of diluted earnings per common share for the
full year 2004 before charges associated with the acceleration of
certain pension obligations in connection with the recently completed
CEO succession process and the second quarter refinancing of the
Company's bank debt and credit facility. Estimated comparable diluted
earnings per common share is presented because management believes it
is a useful adjunct to estimated diluted earnings per common share and
other measurements under accounting principles generally accepted in
the United States since it is a meaningful measure of the Company's
ongoing operating performance and is on a basis consistent with
previous estimates of diluted earnings per common share. Estimated
comparable diluted earnings per common share is not a measure of
financial performance under accounting principles generally accepted
in the United States and should not be considered as an alternative to
estimated diluted earnings per common share. The following table
reconciles estimated diluted earnings per common share to estimated
comparable diluted earnings per common share:
Twelve Months
Ended
December 31,
2004
Estimated diluted earnings per common share $ 4.72 - $ 4.82
Add:
Charge related to acceleration of certain pension
obligations 0.06
Refinancing charge 0.02
Estimated comparable diluted earnings per common share $ 4.80 - $4.90
SOURCE: Quest Diagnostics Incorporated
CONTACT: Laure Park (Investors): +1-201-393-5030 and Gary Samuels
(Media): +1-201-393-5700, both of Quest Diagnostics Incorporated
Web site: http://www.questdiagnostics.com/